After a brief reprieve, politics returned to dominate the headlines this week as Nancy Pelosi announced that a formal Impeachment inquiry would begin in the House. Outside of politics, there was mixed economic news. On the positive side, Japan and the United States appear to have reached a trade agreement. Conversely, the Conference Board reported that consumer confidence recorded the biggest drop in the past nine months, representing the largest shortfall vs. expectations since 2010. In aggregate, markets reacted negatively with both U.S. and Foreign Equities down around 1% for the week. Treasury Yields fell as fixed income instruments continue to provide some diversification benefit when equity markets are choppy.
S&P 500: 2961 (-1.01%)
FTSE All-World ex-US (VEU): (-1.07%)
US 10 Year Treasury Yield: 1.68 (-0.06)
Gold: $1497.39 (-1.16%)
EUR/USD: 1.0943 (-0.68%)
- Monday – The Federal Reserve Bank of New York added $49.7 Billion in liquidity to the financial system via the “repo market” – detailed in last weeks digest.
- Tuesday – Speaker of the House, Nancy Pelosi announces a formal Impeachment inquiry into President Trump.
- Wednesday – U.S., Japan Reach Trade Deal on Farm Goods, Digital Trade.
- Thursday – Pending home sales rebound, rising 1.6% in August.
- Friday – Trump considers delisting Chinese firms from U.S. markets.
Our Take: What Impact Would an Impeachment Have on the Markets?
When considering the impact of a potential impeachment of a U.S. President, it is important to understand the context. First, only two presidents have ever been impeached in the House of Representatives, Andrew Johnson in 1868 and Bill Clinton in 1998; neither was convicted in the Senate or removed from office. To be removed from office, the Senate must convict the President with at least a two-thirds majority. Currently the republicans hold a majority in the Senate. Second, IF Trump is impeached in the House, AND subsequently convicted in the Senate and removed from office, a sudden change in leadership could potentially impact the markets. However, the magnitude and direction of that impact are virtually impossible to predict. For instance, a softer stance on trade could lead to trade agreements with China, although new leadership could also lose some of the progress that has been made.
Finally, any effort to predict the direction of markets based on Presidential leadership has proven to be unreliable. For example, many investors believed that a Trump Presidency would spell disaster for markets, yet the S&P 500 is up over 35% since the 2016 election. Looking back, impeachment proceedings for President Clinton began on October 8th of 1998, and from that day through the election of President Bush on November 7th of 2000, the S&P 500 grew roughly 49%. These returns don’t represent a prediction, but rather they serve as an example that political uncertainty does not always lead to predictable or negative outcomes in capital markets.
The bottom line is that not only is the outcome of the Impeachment inquiry unpredictable, but even if you had a crystal ball, it could still prove difficult to predict the market’s long-term reaction. While we are certainly paying attention to the news, a core tenet of a successful long-term strategy is to avoid making portfolio decisions based on speculation or short-term market volatility. We’ll remain disciplined with appropriate asset allocations for our clients.
Friday’s reports that President Trump is considering delisting Chinese firms from U.S. Markets could have a much bigger impact on investments. However, patience has proven to be the best course of action in response to abrupt announcements from the current administration — we’ve seen numerous examples of threats that appear to be used as leverage in a trade war. For example, a few weeks ago President Trump announced that he was considering ordering all U.S. companies to leave China. The major stock exchanges and index providers have declined to comment on the possibility of delisting.